Much has been written recently on the question of where the Occupy Wall Street movement came from. The assumption seems to be that it represents a new manifestation of the counter-globalization ethos that first showed up in Seattle, 1999.

In some ways this is true, but the actual tactic, camping out, looks to me like an evolution from the tree-sitting strategy of radical environmentalists. Forget about Facebook and Twitter: this is the REI generation, and they want to climb and bivouac their way to liberation. It really makes sense when you think about it. To transgress the landscape of capitalist property rights, you need the proper gear. The only anomaly I can see is that pepper spray is being used against the campers, not by them.

Footnote: It might be argued that the starting point was really Greenpeace, which drew on small craft culture for its maritime adventures. Having noodled around in both outdoor and boat equipment shops, I think I can say that they represent two rather different slices of humanity, and the probability of crossover was slim. Of course, Greenpeace was also practicing urban mountaineering around the same time as Earth First was exploring the canopy zone.

Maybe you’re in a hurry, so here is the problem in its general form: most of the reading public, even most of the fairly well-educated reading public, have little exposure to mainstream economic reasoning. If they ever took an econ course, they did not come away with a durable understanding of opportunity costs, markets as cost-benefit algorithms and coordinating devices, market failure, etc. This means there’s always an audience for a book that packages these rather standard ideas in a clever, unexpected or cool way. Unfortunately, underneath the ribbons and shiny paper, it’s the same old same old.

Monday, November 28, 2011

I am currently making my way through Hume's History of England - a pure joy - and ran across a quote to share. In his discussion of the 1640 Long Parliament and the execution of Lord Strafford, he has this to say about the Puritan leaders Pym, Hambden and Vane:

Some persons, partial to the patriots of this age, have ventured to put them in a balance with the most illustrious characters of antiquity; and mentioned the names of Pym, Hambden, Vane, as a just parallel to those of Cato, Brutus, Cassius. Profound capacity, indeed, undaunted courage, extensive enterprize; in these particulars, perhaps the Roman do not much surpass the English worthies: But what a difference, when the discourse, conduct, conversation, and private as well as public behaviour, of both are inspected! Compare only one circumstance, and consider its consequences. The leisure of those noble ancients was totally employed in the study of Grecian eloquence and philosophy; in the cultivation of polite letters and civilized society: The whole discourse and language of the moderns were polluted with mysterious jargon, and full of the lowest and most vulgar hypocrisy.

Saturday, November 26, 2011

In the world of climate economics, Richard Tol is a major name. If his most recent post on the topic is any indication, he should pick another line of work. Tol points to the desire of many people, including some of his economist colleagues, to move to warmer locations as “revealed preferences for climate”. His final paragraph hedges a bit, but leaves the impression that the sunbirds are telling us something about policy:

Obviously, one cannot compare the individual impact of moving to a warmer climate with the impact of global warming, but at the same time it is clear that both Dublin economists specifically and intra-European migrants generally do not object to a warmer environment.

Yes, people move to warmer climates. They lie under sun lamps and bake in saunas. Thermo- and phototropism have nothing to do with the risks of climate change, of course. The major risks are:

•sea level rise that inundates, or ravages with storm surges, coastal areas that are home to much of the world’s population

•the extinction of species that cannot adapt at the rate at which their environment is changing

•an increase in the frequency and severity of severe weather events

•the loss of water storage in glacial formations

•shifts in rainfall patterns that could subject more regions to drought, fire and other hazards

•loss of agricultural productivity in tropical and many temperate regions

Personal preferences for a few degrees of temperature more or less have nothing to do with it. Tol seems to be another poster child for the tendency of economic expertise to coexist with appalling ignorance about just about everything else. Is economics worse this way than other fields, or am I just more sensitive to it because it rubs off on my reputation as well?

Friday, November 25, 2011

This extraordinary singer died a few days ago at the age of 69. She had it all: purity of tone, deep personal expression, the ability sing in a vast array of styles, from Arabic and Sephardic to medieval to opera to folk song. If you haven’t heard El Cant de la Sibilla, her recreation of a medieval religious incantation, or Ninna Nanna, her complication of lullabies from around the world and across the ages, you are missing something wonderful.

As faction is the effect of that loose government which is unavoidable in a time of war and trouble; so, while faction is suffered to continue, it is a perpetual bar to better administration; for it emboldens the bad, and terrifies the good. Is a lunatic, whom the physician cannot approach without danger to himself. Some statesmen, therefore, when it rages high, withdraw from affairs, and will not administer the physic of their councils till the fit is over.

Wednesday, November 23, 2011

Many observers are declaring Italy to be the key to whether the euro will collapse and along with it possibly most of the world economy. Having removed the near term problem from office, Silvio Berlusconi, the markets are not satisfied with the appointment of respected economist technocrat, Mario Monti, to replace him, with bond yields continuing to rise, thus threatening to bring about a crisis. What is it that Monti is or even can do to stop this?

Quite likely not a damned thing. Looking at supposed fundamentals, there should not be a problem with Italy. It is one of only four Eurozone nations that is currently running a primary budget surplus. The others are Luxembourg, Belgium, and Germany. Where is the problem?

Well, some say, aha!, look at the national debt to GDP ratio, a too high 120%. However, not only has Italy had a ratio such as this for a long time, and even been higher prevously, such as in the early 1990s, it has a much higher share of its debt domestically held, Italy has a much higher savings rate than most European nations (on the order of 17%). This would explain the NY Times story today that as long as Italians continue to hold their own debt, the euro will be saved.

What about proposals being made in Italy? One is that the retirement age be raised from 65 to 67. Maybe this should be done, but again, Italy has a primary budget surplus, and 65 is higher than quite a few other European nations have as a retirement age. And if such a "reform" is passed, it will have little near term impact on the budget balance, although maybe doing so will induce that magic effect of "raising confidence," thus bringing down the interest rates.

The other is labor market reforms, particularly to open up various professions to more entry and competition. This will be hard to pass, but I think there may be reasons for doing this, and this may well help increase the growth rate, which has been low for a solid decade, and needs some stimulus, however achieved. But, again, this is not likely to affect the budget balance at all. Why this would bring down overly high interest rates is also very unclear aside from hoping for the "confidence fairy" to suddenly appear.

That the confidence fairy has not appeared with the removal of Berlusconi is disturbing. It looks increasinigly to me that these high interest rates are simply a self-fulfilling negative bubble on Italian bonds unjustified by any actual fundamental phenomena. Even with the high interest rates, most reports suggest that Italy can manage to avoid any defaults for at least another year. It is not Greece, or even the less troubled Portugal, Ireland, or Spain. It is basically solvent. The only real threat is the high interest rates, apparently existing because of the fear of what high interest rates can do, a possible self-fulfilling prophecy, an empty, if still dangerous negative bubble.

Tuesday, November 22, 2011

The recent elections in Spain point once again to a flaw in the voting procedures of all supposedly democratic countries: they prevent citizens from expressing what they actually think in the voting booth.

Do you suppose there was a sudden outpouring of love for the Spanish right? More likely, there was an outpouring of disgust for the Socialists and the economy-without-a-future over which they preside. The ballot, however, did not offer the opportunity to vote against the party in power, only for the opposition. Thus the conservative Popular Party will enter government with what it claims is the support of the majority, when the reality is that is probably has less support than it had at the time of the previous election—which it lost.

There is a simple solution: provide voters with the option of either voting for a candidate or party, if they want to express support, or against a different one if they want to express rejection. The final tally would be the number of votes for minus those against. In a two party/candidate race the final result would be the same. In a multi-party race, voters would have to think strategically about whether their feelings are more concentrated for or against any particular alternative. In either case, you would see clearly the extent to which democracy was working, in the sense of producing a government that citizens actually support.

My guess is that, given a negative option, the people of Spain would have delivered two verdicts, one against their current rulers and the other, only somewhat less intense, against their future ones. They should have had that chance.

Monday, November 21, 2011

I just glanced at Tyler Cowen’s model of a Eurozone downturn and noticed there are a couple of minor elements missing—the trade imbalances between the surplus and deficit countries in the period leading up to the financial crisis, and the financial crisis itself.

That’s right: Cowen explains the current Euromess without any reference to what transpired in 2008. Imagine how much worse it would be if the crisis that actually happened actually happened.

Saturday, November 19, 2011

You say to somebody, you shouldn’t go to work before you’re what, 14, 16 years of age, fine. You’re totally poor. You’re in a school that is failing with a teacher that is failing. I’ve tried for years to have a very simple model. Most of these schools ought to get rid of the unionized janitors, have one master janitor and pay local students to take care of the school. The kids would actually do work, they would have cash, they would have pride in the schools, they’d begin the process of rising.

I don’t know what your reaction was, but the first thing that popped into my mind was, why take it out on the janitors? If the school was failing it wasn’t their fault. According to Gingrich, it’s the teachers who can’t make the grade. So why not put the kids to work following lesson plans, going over last year’s standardized tests, etc.? There would be as much pride in this as in cleaning toilets.

But let’s not get hung up on details. Isn’t it nice having a historian running for president—someone who knows what was really good about the good old days?

Friday, November 18, 2011

Speaking of Germany and economic virtue, here is a question about the Walt Disney classic, Three Little Pigs. Take a look at the third little piggy, the one who builds his house of bricks. He wears overalls. In American pop culture circa 1933 (the date of the cartoon’s release), only farmers and Germans wore overalls, and I don’t see a farm. Also, the first two piggies play the flute and fiddle, while No. 3 has a piano with sheet music.

Am I reading in too much? (I do not see the framed portrait of dear old dad as a string of Würstchen as a corroborating clue, by the way.)

As a footnote to the previous post, here is an observation about the German obsession with inflation. Media accounts always bring up the hyperinflation of the 1920s and its supposed role in ushering in the Third Reich. This is bad history: a decade transpired between the inflationary madness of 1923 and the handing off of the chancellorship to Hitler. That trope should be buried once and for all.

More generally, while the experience of the ‘20s is invoked by Germans themselves, I think it’s little more than a convenient rationalization. Most Germans are generations removed from this era; it has as little relevance for them as, say, the great Mississippi flood of 1927 has for those living along its banks today.

The real reason is that Germany is a country of savers. The savings rate is high, and savings are distributed broadly. Saving is valorized by the culture; you could argue that it is seen as the greatest virtue of all, above courage, generosity and all the rest. It is an act of self-denial that looks to the future—one’s own and that of the generations to come. To have savings is to be free. Germans see the capital stock of the country as the product of their own savings, and to a large extent they are right. The mass savings institutions, the Sparkassen and the Postbank and savings banks, constitute the bulk of German finance. Germany is a savocracy.

The great threat to savings is inflation. Long before hyperinflation destroys savings altogether, modest inflation chips at their edges. Policies that permit inflation to increase penalize savers, and this makes them immoral, since saving is the epitome of morality. Better to allow your economy to go down in flames than to resort to the wickedness of the printing press; at least, in the rubble, you will have your savings to draw on.

Among other things, this perspective fails to take account of where savings come from. Yes, they come from choices people make, but they also come from the income that make those choices possible. Cut someone’s salary in half, and no matter how virtuous they are, their savings will take a hit. And a significant part of German income derives, directly and indirectly, from its trade surplus with debtor countries like the Eurozone peripherals and the US. In other words, the virtue of savings is inseparable from the vice of debt. Simple accounting identities require this to be true, but it to point it out is to remove yourself from respectable public opinion in Germany.

Of course, it’s easy for me to see this as an American, the product of a massively indebted society buffered by the exorbitant privilege of minting the world’s currency....

European institutions, including the Eurozone, remain treaty organizations whose members are sovereign countries. This is why important policy decisions have to be unanimous. As a result, we have heard the lament that small, wayward countries have an unwarranted veto power and can hold everyone else hostage. You know, the Finns, the Slovaks and their ilk.

In fact, the small and weak do not have this power. If they try to throw sand in the gears, they will be put in their place one way or another. A country like Finland, for instance, is simply too vulnerable to political and financial pressure to try to dictate Eurozone policy single-handedly. Was anyone surprised when the True Finns, a party that campaigned on xenophobic nationalism, backed down and allowed the latest Greek financing package to go through?

The real threat to multilateral institutions has always been the veto power of the strong. This is true of the US within the UN system, and it is increasingly clear that it is true of Germany in the current euro fiscal crisis. As the moment of reckoning draws near, and as the need for a true lender of last resort to backstop euro-denominated credit becomes inescapable, one after another, the members of the zone are falling into line and demanding that the ECB mature into a real central bank.

Everyone except Germany. Angela Merkel draws her line in the sand: “If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” Hans-Werner Sinn, an economist whose every pronouncement is accorded scriptural authority, spits out the epithet “printing press” six times in a recent op-ed demanding that the ECB remain neutered.

In a nutshell, the German position is that any risk of inflation, no matter how small the inflation or the risk, outweighs the possibility of a financial meltdown resulting from a shortfall of euro liquidity. If a country undergoes a run on its banking system or sovereign debt (typically connected), it is a sign of profligate living, and the specter of default is needed as an incentive for “reform”. This attitude—and it is simply an attitude, not a rational economic argument—is the proximate reason why the global economy is on the brink.

So Germany, the biggest, strongest, richest country in the Eurozone is the rogue state, exercising its veto in increasing defiance of world opinion. Forget the True Finns; the parties whose absurd demands are threatening to plunge Europe, and the rest of us, into crisis have names like the Christian Democrats, the Free Democrats, the Social Democrats and the Greens. Will any of them start to crack before it's too late?

Thursday, November 17, 2011

Two of the campuses of California State University are striking today. The timing of the strike is unfortunate, coming at the same time as fees are raised once again almost 10%. The union realizes that pay raises are a small part of the overall abuse of higher education in California, but strikes are only permitted in opposition to the contract with University system. Chronic underfunding began during the first term of Jerry Brown, when the passage of proposition 13, frightened him. Not only is the administration grossly overpaid, its management style is arrogant and heavy-handed. Finally, the gutting of public education at all levels means that students come to the University underprepared and, more often than not, lacking the funds to pay for their education. Not only do they fall under a heavy debt burden, they work too many hours after school in order to focus on their education. To add insult to injury, all of us have to listen to public figures telling us how our economic future depends upon educating young people, presumably without any tax burden unless such funds are directed to hedge funds engaging in charter school scams.

Wednesday, November 16, 2011

I’m slow to get up this morning after a concert last night by this great Swedish folk group. They played in an ancient church—great acoustics—in the tiny village of Freepsum in northwestern Germany. Although they’ve been together for 22 years, this was the beginning of their first German tour. (“We’ve had a lot of time to practice”, said Roger Tallroth, the guitarist.)

On stage, the core of Väsen is Olov Johansson, who plays the nyckelharpa–like its name says (in Swedish), a stringed instrument with keys. He flies through complex runs in the dance tunes and produces a resonant tone for the slow airs. While a few of the pieces they played were traditional, most were composed by one of them, especially the fiddle player, Mikael Marin.

Väsen’s virtuosity is exceptional. Their sound is rich with harmony (think Ravel), even when they are blasting away at high-tempo polkas. Toward the end of the night they started to fool around, and this was good too. Lucy in the Sky with Diamonds mixed in with 18th century Swedish fiddle standards—why not?

They will be returning to the US in a few months, playing the Wintergrass festival in Bellevue in February and other events. Not to miss.

Monday, November 14, 2011

I am writing a first draft of my introduction to the paperback edition of my book. Any feedback would be very much appreciated.

The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression first appeared in October 2007, just as the stock market was peaking. Judging by the public pronouncements by economists and the business press, the economy appeared modestly healthy before the breakdown of the subprime mortgage market. In fact, the weakness of subprime mortgage market was a symptom of deeper problems that had been eating away at the economic core.

In addition to a diagnosis of these deeper problems, such as growing inequality and an emphasis on financial activities, rather than more productive economic endeavors, the book offered a historical analysis of the willful gutting of the economy that occurred over the last four decades. The Confiscation of American Prosperity presents this history in the form of a crime story, beginning with an accounting of the economic plunder engineered by a small part of society, with the complicity of both political actors and many, if not most, economists. The second part of the book describes the way that this group was able to carry out the theft of enormous wealth. In the tradition of crime stories, the third part of the book examines the expected retribution. The final section addresses the incompetence of the economists, who should have acted as policeman while the plot was unfolding.

The recent protests of the Occupy Movements indicate a deeper understanding of the crime than either the business press or the economic analysis following the meltdown of the financial system. The protesters correctly realize that many of the most serious perpetrators have escaped from the crisis without retribution. Their outrage might contribute to some modest retribution, but the expected retribution discussed in the book will come from more serious economic disruptions that are all but certain, without addressing some of the economic imbalances created by the crime. Of course, the economy can begin showing signs of health once again, but sooner or later the imbalances will take a serious toll on the economy.

Historically, economic crises do tend redress some imbalances, but political mobilization is also an important element in returning to a more healthy balance. One can only hope that such mobilization will be effective enough to prevent another Great Depression.

In the past couple of weeks, the Sandwichman has uncovered not one but TWO previously unheralded milestones in the history of "best-known fallacy in economics". The first is a erudite defense by an accomplished first-generation political economist, Rev. Thomas Chalmers (1820), of the proposition that "there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..." The second is a spirited plea by Dorning Rasbotham, Esq.(1780) for the use and encouragement of machines that attributes to "some persons staggered by this argument" the false view that there is only "a certain quantity of labour to be performed."

It’s taken a day for this to settle in, but I find myself to be really embarrassed on Tyler Cowen’s behalf. Yesterday he published a New York Times op-ed on the subject of why American’s don’t revere the rich, even though riches are usually the result of discipline and hard work.

Put aside his indirect reference to Steve Jobs (“earning money through production for consumers, as Apple has done”). Rightly or wrongly, Jobs was admired because he brought industrial design values—beauty arising out of function—to high-tech products; he seemed to be as much an artist as an entrepreneur. Over at Microsoft, Steve Ballmer has a work ethic second to none, and he will die a very rich man, but I doubt there will be much public outpouring of grief.

Let’s get to the core issue. Assume there are four individuals, A, B, C, and D. A and B are at the struggling end of the working class, C and D are rich. A and C have only an average attachment to work and self-discipline; B and D drive themselves to the limit. Suppose their annual incomes look like this:

A: $20,000
B: $30,000
C: $200,000
D: $2,000,000

If you had a lot of observations like this, and if you could somehow measure “work ethic”, you would find a healthy coefficient on it in an income regression. But what would this have to do with the popular revulsion against an income distribution so skewed to the top? The problem is not that there is a return to hard work, but that the return is so obscenely large at the high end and so small at the bottom. Think of that old Jesse Jackson speech:

I know they work. I'm a witness. They catch the early bus. They work every day. They raise other people's children. They work every day. They clean streets. They work every day. They drive vans with cabs. They work every day. They change the beds you slept in these hotels last night and can't get a union contract. They work every day. No more. They're not lazy. Someone must defend them because it's right, and they cannot speak for themselves. They work in hospitals. I know they do. They wipe the bodies of those who are sick with fever and pain. They empty their bedpans. They clean out their commode. No job is beneath them, and yet when they get sick, they cannot lie in the bed they made up every day. America, that is not right. We are a better nation than that.

What does it mean when someone can see the self-discipline of the millionaire but not the double- and triple-shifts of the working poor? Like I said, I’m embarrassed for Tyler Cowen.

Sunday, November 13, 2011

To a large extent, the New York Times sets the news agenda for American journalism. Today’s Times backgrounder becomes tomorrow’s conventional wisdom throughout the broadcast media and the regional press. So we should take notice when Arthur Brisbane, the Times’ “public editor”, writes of Occupy Wall Street

An investigation into origins would lead to the identities of early leaders, at least, and the search for the broader leadership of the movement should continue from there. I polled a group of journalism educators on the question of how The Times should direct its coverage henceforth. Not all agreed on this, but most said it was important to understand who the leaders were and what demographics they represented.

This brings me back in time, to the late 60s and early 70s, when another largely formless movement was making itself felt in America. On the ground, this radical upsurge was composed of affinity groups, underground newspapers, community storefront projects and streetcorner networks. It had a visceral distrust of leaders and authority, of having others speak for you.

Nevertheless, a pathological symbiosis developed between the media and a relatively small number of movement self-aggrandizers. The ambitious would-be leaders discovered that they would be anointed by the media as long as they adopted ever more outrageous postures and rhetoric, and the media found that by focusing on them they had a story they could cover in a convenient, template-satisfying way. Unfortunately, that was not all. Because the movements of the time had weak institutional structures, they ultimately depended on media coverage to attract new recruits and hang onto old ones. Thus, when “leaders” like the Weathermen and the Black Panther Party flamed out, they sucked the rest of us down with them.

But here’s the thing: neither I nor anyone I knew in this movement chose these “leaders”, nor did we feel represented by them in the slightest. Our story, whatever it was, had little to do with its representation in the media. We were seeking something completely different, but this quest was cut off and even our memory of it was gradually erased by years of repetitive, fixated discussion of our Promethean but, alas, flawed “leadership”.

Lessons? They are partly about the role of the media in refashioning social movements so they fit the standard journalistic model of who they are and how they should function. Even more, they are a warning to the movements themselves, that they have to give thought to their own self-defined structures that convey who they are, what they believe, who is permitted to represent them, and how new recruits can join in.

Saturday, November 12, 2011

Klein got her start, at least outside her native Canada, as a cultural critic in the wonderful book No Logo. Since then, with each project she has dipped further into economics, with a weird bifurcation: her political and cultural analysis has become even more insightful, but her understanding of economics has not kept pace. This was a problem in The Shock Doctrine, and it is a problem in her missive on climate change on view in the current Nation.

It seems incredible that any economist, as late as this year, would claim that for the very first time in history there has been performed an investigation into the network of owners of global capital. But that is indeed what authors Vitali, Glattfelder and Battiston state in the opening paragraph of their abstract entitled 'The network of global corporate control'.

“The first investigation of the architecture of the international ownership network is presented, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers… network control is much more unequally distributed than wealth. In particular, the top ranked actors hold a control ten times bigger than what could be expected based on their wealth…”

"...nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations. A relevant additional fact at this point is that 3/4 of the core are financial intermediaries...."

The implications are mind boggling. How incredibly fragile must the global economy be when such an incredible lack of diversity of enterprise (and therefore also of intellect and strategic resilience) are present.

It is possible to see our world now facing very serious global trading and current account imbalances due to these enormous organisations having moved their gigantic 'enterprises' into pockets of cheap labour, land and currencies to gain an artificial economic advantage. As one big TNC after another diversifies into many enterprises there is a simultaneous loss of diversity for the economic system as a whole. This problem escalates when TNCs combine strategies through global networks. It's not surprising that vast portions of world trade have long metamorphosed into non-trade intracorporate transactions.

Friday, November 11, 2011

I sometimes carp about minor missteps, but this is big. In a front page “explanation” of how the eurozone got into a sovereign debt crisis, there is criticism of myopic banks, lax regulators and spendthrift peripheral governments, but no mention of the fundamental underlying cause, the swelling imbalances between surplus and deficit countries in the currency union.

The Times reporters and editors need a refresher in introductory economics. The fundamental identity that connects financial balances to a country’s international position is

BP + BG ≡ CA

where BP is the net savings of the private sector (income minus spending for households and firms), BG is the government's fiscal surplus or deficit, and CA is the current account balance (mostly trade).

Over the decade of the 00's, the peripheral countries were running ever larger trade deficits with the core countries, especially Germany. At first these deficits were financed by private sector borrowing, but after the financial crisis hit private sector leverage froze, economies contracted, and governments stepped in to do the borrowing themselves. Before 2008 the problem was too much borrowing in real estate, banking and other sectors; after it was too much borrowing by the government. Yet, as long as the trade imbalances grew, one or the other was unavoidable.

(From a macro identity point of view, if governments had not increased their deficits post-2008, incomes would have collapsed. This would sustain the identity by curbing imports on the right hand side, but would have allowed an economic freefall.)

So the real story, the one that the Times should have told, is about how the imbalances grew, why few noticed, and how the eurozone framework, with its utterly irrelevant “Stability and Growth” criteria, was unable to cope.

Skip the Times and get your news and views from the econ blogosphere.

Footnote: Nothing Greece and Italy do by way of budget policies or “reforms” can solve their sovereign debt problems. They might as well sacrifice goats to the gods. The only practical significance of the current political drama is that it will or won’t persuade the core countries to open the liquidity spigots, write down debts and resolve the banks.

Thursday, November 10, 2011

What more is there to say? Europe is on a precipice, political as well as economic. Eurozone leaders think they have time to slowly habituate their constituencies to incrementally greater commitments, as if we didn’t know from centuries of experience that financial crises descend with terrifying speed in the form of bank runs, panicked asset dumps, and other spasms of runaway positive feedback. Greece, Portugal, Spain and Italy will not edge gently toward insolvency; one or more of them will undergo a sudden phase change, and the game will be up as soon as it has started.

And incantations of austerity and reform are pointless. Simple arithmetic demonstrates that the peripheral countries cannot pay their way out of debt through primary fiscal surpluses: at current real interest rates and debt loads it just can’t be done. Moreover, fiscal tightening throughout the zone can only lead to a severe recession, and as indicators of the slump materialize the panic dynamics will intensify.

Worse, the “reform” imperative—the demand that deficit countries privatize and deregulate—is punitive nonsense. Politics in the surplus countries seems to demand that there be a story about wayward prodigals to the south who must be stripped of their comforts and put to the yoke. Put aside this morality tale and there is no economic logic whatsoever. There is no theoretical or empirical reason to believe that Greece, Italy and the rest are in deficit because they have too much public employment or their workers have too many rights. (Where there is corruption and clientelism, any sort of employment, public or private, can be uneconomic.) In fact, those who want to force-feed these reforms, with public displays of abject political submission to them, have never even tried to make this case. There is no argument to critique, no evidence to rebut. “Reform” is not a rational economic program for restoring trade balances; it is about exacting a cruel price on entire populations so that bailouts come with a quid pro quo. Receive a transfer and you must sacrifice.

Of course, the bailout funds go directly to the creditors, mainly private banks, so even this attempt at moral equivalence is beside the point.

Eurozone policy, and most journalistic coverage of it, is in a parallel universe of virtue and vice, benefactors and supplicants, industrious and indolent, modern and honest versus traditional and corrupt. It satisfies a craving for moral order. Unfortunately, the real universe is about to crash into it and smash it to pieces.

Wednesday, November 9, 2011

At eleven seconds past eleven minutes after 11 AM this Friday, November 11, 2011, the time/date in succeeding digits will be for the only time this century a sequence of a single digit repeated a dozen times, 11/11/11/11/11/11. Enjoy it while it lasts.

Since the century began on 01/01/01 (no year zero, 2000 was indeed the last year of the 20th century), I have been thinking about those once a year days when one has the same two-digit number repeated three times for the date. There will be one more of those next year for this century on 12/12/12. I think the only one of these that got much attention was 07/07/07, which somehow became a faddish day to get married, one of my faculty colleagues (not in my dept) doing so then.

While thinking about this upcoming event this year, I was thinking about the fact that it was the old Armistice Day and remembered hearing when much younger that the armistice that ended WW I between France, Germany, Britain (and its empire), and the US was signed on "the eleventh hour of the eleventh day of the eleventh month" in 1918 (the war went on for several more years in some other locations). This got me thinking about time as well as date and how this one was full of elevens.

Then on Nov. 1 I was sitting in a piazza in Trento, Italy drinking some macchiato (gave a lecture there the next day) and saw a sign for the date, 1/11/11, and realized that we were dealing this time with a sequence of a single digit. Putting that together with my thoughts about both time and date led me to the conclusion I am posting on now here, which I think I am the first person to point out.

So, on Friday, when the moment comes for you wherever you are, have a happy onece-in-a-century 11/11/11/11/11/11.

Tuesday, November 8, 2011

Do I have this right? The New York Times has an article today about the Cuban medical mission in Haiti. After describing the modest perks doctors get for signing up, it says:

They are not allowed to bring their families with them, but the other incentives make it “a pretty good deal,” she [Katrin Hansing, a Baruch College professor] said, that has helped keep down defections. Still, a program the United States has run since 2006 that is tailored to attract Cuban medical professionals abroad has enticed several hundred to defect.

Does the US really have a program to bribe Cuban doctors who are serving the poorest and most at risk populations in the world to quit, emigrate, and join the dysfunctional American medical establishment? Is this cynical or what?

If the article is saying what I think it says, I have even more respect for the Cuban medical authorities, who continue their life-giving services abroad even though they lose many of their best and brightest in the process.

Care to know the future? Then read Michael Pettis, who has been on top of things for many years running. Nothing is certain, but I think his scenario, where a bank run crashes eurozone policy and forces Greece (for starters) out of the common currency, is the one we’ll probably see.

Sunday, November 6, 2011

They are gathering in coffee shops, gyms and multiplexes, conspiring to wreak havoc on the US economy. You know who they are: the boomers and near-boomers, the demographic bulge that will rip a giant hole in fiscal budgets and push working-age taxpayers into martyrdom or worse.

Don’t take it from me. David Leonhardt, in today’s New York Times, talks about the impending collision of slow economic growth with “sharply increasing claims” that “come from the aging of the population”. He quotes Benjamin Friedman of Harvard: “These are very difficult moral issues. We are really talking about the level at which we support the elderly retired population.”

This is common wisdom, one I’ve heard more times than I care to remember. Does it matter that it’s wrong?

1. Aging, and increases in the proportion of the population no longer active in the labor force, is nothing new. The US and other industrialized countries have been adapting to this trend for generations. In fact, the increase in retirees we face in the future is not nearly as dramatic as those we’ve dealt with in the past.

2. The secret weapon against the attack of the seniors is not growth per se but productivity growth, output per worker. As long as this increases faster than the ratio of retirees to active workers—and it has ever since we started gathering statistics on it—we can afford to take of our elders and improve living standards for the young and spry simultaneously.

Demographics is a false issue. I’ll trust the motives of those who pound that drum when I start seeing articles about how the economic burden of the defense (i.e. war) budget poses a moral issue that demands courage and sacrifice, etc. The demographic bulge I worry about is predator drones.

Tuesday, November 1, 2011

1963 was a pivotal year. It was the year that OPEC acted unilaterally to raise prices for the first time. It was a time when a charismatic new American president, John Fitzgeral Kennedy, presented his proposals for tax reform for his nation. Included was a plan for the removal of the special-privilege oil depletion allowance enjoyed by large oil companies. He also issued Executive Order 11110. Its aim was to strip the US Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. Kennedy ordered the printing and release of $4.2 billion in US notes, paper money issued through the Treasury Department ‘without paying interest’ to the Federal Reserve System.

In 1963 E Howard Hunt, Chief of Covert Action in America's Central Intelligence Organisation's Domestic Operations Division was involved in the subsidizing and manipulation of news and publishing organisations. Hunt was eventually implicated in the November 1963 assassination of President Kennedy .

But on this day, 2nd November, of that year, the assassination of the President of South Vietnam was another careless step toward the long drawn-out Vietnam War that cast such an ugly shadow over the decade that followed.

"The coup was very swift. On November 1, 1963, with only the palace guard remaining to defend President Diem and his younger brother, Ngô Ðình Nhu, the generals called the palace offering Diem safe exile out of the country if he surrendered. However, that evening, Diem and his entourage escaped via an underground passage to Cholon, where they were captured the following morning, November 2. The brothers were executed in the back of an armoured personnel carrier by Captain Nguyen Van Nhung ...Diem was buried in an unmarked grave in a cemetery next to the house of the US ambassador.
...
Upon learning of Diem's ouster and death, Ho Chi Minh is reported to have said, "I can scarcely believe the Americans would be so stupid." ....After Diem's assassination, South Vietnam was unable to establish a stable government and numerous coups took place during the first several years after his death...."[1]

A White House tape of President Kennedy and his advisers, published in 2003, confirmed that top U.S. officials sought the coup against Ngo Dinh Diem "without apparently considering the physical consequences for Diem personally." [2]

The previous month US President John Fitzgerald Kennedy had been insisting that one thousand U.S. troops in Vietnam, "euphemistically referred to as advisers", be recalled.

"He was a prudent executive, not inclined to heavy investments in lost causes. His whole presidency was marked precisely by his capacity to refuse escalation-as in Laos, the Bay of Pigs, the Berlin Wall, the missile crisis. [3]"

Indeed, Kennedy was deeply skeptical of the recommendations presented by his Joint Chiefs of Staff for military intervention in South Vietnam.

"The military proposals for Vietnam, he said, were based on assumptions and predictions that could not be verified - on help from Laos and Cambodia to halt infiltration from the North, on agreement by Diem to reorganisation of his army and government, on more popular support for Diem in the countryside and on sealing off Communist supply routes. Estimates of both time and cost were either absent or wholly unrealistic. [4]"

In an interview with one of America's cold war warriors, Dr Walt Rostow was asked to comment about the consequences of "the war for South East Asia?"

WR: Well, for South East Asia it's turned out to be fine, because at last Indonesia has gone in to take off very fast, seven per cent now, and Singapore, Malaysia, Thailand, Taiwan, Hong Kong, South Korea are doing fine, even Philippines is coming along. So, South East Asia is... Lyndon Johnson achieved what he was after in South East Asia. ...As a development economist I have to say, when a country does well, like South Korea or Taiwan or something, it's because of the people in the country, otherwise you're pushing on a string. But we did play a very useful part in helping them. It's amazing, but in this period of 1960 to, what 1975, '80, they were going on average at eight per cent a year for wages. That means they more than doubled in ten years. So they're four times the size, as it were, GNP per capita at the end of this period and the beginning. They were different countries....[5]"